1. IP Telephony: Economic implications and impact on PTOs Dr Tim Kelly, International Telecommunication Union, IP Telephony Workshop, Geneva, 14 June 2000 The views expressed in this presentation are those of the author and do not necessarily reflect the opinions of the ITU or its membership. Tim Kelly can be contacted at tim.kelly@itu.int.

2. IP Telephony: Economic implication and impact on PTOs Definitions and market evolution  PC-to-PC; PC-to-Phone; Phone-to-Phone; IP Voice/Web integration applications How big will the market become?  Market potential  Constraints to market development Impact on public telecommunication operators  “Bypass” of accounting rate system  How should developing country carriers respond?  Impact on tariff rebalancing Economic and strategic questions  Is IP Telephony traffic a substitute or a supplement?

3. What is IP Telephony? “IP Telephony” is the transmission of voice signals over packet-switched IP-based networks. There are two main subsets:  “Internet Telephony”: using the public Internet;  “Voice over IP”: using private, managed IP-based networks, in addition to the Public Internet. “IP Telephony” is also used as a generic term to cover Fax over IP, Voice over Frame Relay, Voice over xDSL etc, Relevant ITU-T standards include H.323, H.324, H248, T.120 etc.

4. IP Telephony: Four main stages of evolution 1.PC-to-PC (since 1994)  Connects multimedia PC users, simultaneously online  Cheap, good for chat, but inconvenient and low quality 2.PC-to-Phone (since 1996)  PC users make domestic and int’l calls via gateway  Increasingly services are“free” (e.g., Dialpad.com) 3.Phone-to-Phone (since 1997)  Accounting rate bypass  Low-cost market entry (e.g., using pre-paid cards) 4.Voice/Web integration (since 1998)  Calls to website/call centres and freephone numbers  Enhanced voice services (e.g., integrated messaging)

5. 1. PC-to-PC over IP Needs similarly equipped Internet users (e.g., IP telephony software, multimedia PC etc), both logged-on simultaneously Main applications: avoidance of usage-based telephone charges, chat-rooms, company LANs Application providers include Firetalk, Phonefree Potential Market: < 50 million users? Internet Phone Gateway Computer

6. 2. PC to phone over IP Internet users with multimedia PC able to call any phone or fax user (not, at present, vice versa) Main motivation: Reduced telephone charges, “free” calls to US, Korea, Hongkong SAR etc Service providers include Net2Phone, DialPad etc Market potential: Sending, >250 million Web users, receiving >1.3 billion telephone/mobile users Phone Gateway Computer TelephonePublic Switch Internet Desktop PCFax

7. 3. Phone to phone Mobile, over IP Any phone/fax/mobilephone user to any other Main motivation: Reduced call charges, accounting rate bypass, market entry for non- facilities-based carriers (e.g., via pre-paid cards) Service providers include speak4free, I-link etc Market potential: >1.3 billion phone/fax/mobiles Telephone Public Switch Internet Phone Gateway Computer Fax

8. 4a. PC to website/ Call centre, over IP Internet users with multimedia PC browse Website and choose voice/video connection option Main motivation: Service provider can interact directly with potential clients, via voice or video, for instance for telemarketing, freephone access Service providers include NetCall, ITXC etc Market potential: >250 million Internet users Web Server Public Switch Internet Desktop PC Phone Gateway Computer at Service Provider Telephone

9. 4b. Phone/ to website/ e-mail, over IP Phone or mobilephone users utilise enhanced services (e.g., integrated messaging, voice response) available from IP service provider Main motivation: Integrated messaging, computer telephony integration, m-commerce Market potential: >1.4 bn phone/mobile users Service providers include Yac.com, T2mail etc Web Server Public Switch Internet TelephoneMobilephone Phone Gateway Computer at Service Provider Phone Gateway Computer at Local PoP

10. Constraints to IP Telephony Quality of service  But, getting better, thanks to common standards, upgrade to IPv6, diffserv etc.  Transition to private, managed networks (VoIP) rather than use of public Internet (Internet Telephony) Bandwidth  But, getting better, particularly on trans-Atlantic and trans-Pacific routes  Bandwidth shortage still a problem in developing countries especially if gateway to IP is asymmetric Regulatory prohibition  But, more than 70% of int’l traffic flows between markets where IP Telephony already liberalised  Many more regulators are liberalising some form of IP Telephony, or “turning a blind eye”

11. Economic and strategic questions How big is the market for IP Telephony? How big will it become? What impact is IP Telephony having on net settlement payments to developing countries? Does IP Telephony generate new traffic, or does it substitute for existing traffic? What impact will IP Telephony have on tariff rebalancing strategies of carriers? Should developing country carriers attempt to block IP Telephony or to provide it? Should incoming and outgoing IP Telephony calls be treated differently?

12. How big is the IP Telephony market? How big will it become? IDC forecasts that “Web Talk” revenues will reach US$16.5 bn by 2004 with 135 billion mins of traffic DeltaThree estimates that IP Telephony will generate 16 billion mins of int’l traffic in 2000 IP Telephony as % of all int’l calls in 2004  Tarifica forecast 40%  Analysys forecast 25% In developing countries, the majority of IP Telephony calls are incoming Source: IDC. “Web Talk” revenues, US$bn

13. Minutes of use by month, Hongkong SAR ('000s) Source: OFTA (www.ofta.gov.hk) 0 250 500 750 1'000 1'250 1'500 4 98 6 8 10 98 12 98 2 99 4 6 8 10 99 12 99 02 00 Dial-up Internet (via PSTN) International voice (incoming and outgoing)

14. International traffic, between United States and Argentina, (000s minutes) Source: ITU/TeleGeography inc., “Direction of Traffic” database. 0 100 200 300 400 500 199019911992199319941995199619971998 Estimated bypass traffic Actual traffic on route

15. Dial-up Internet traffic as % of total traffic minutes 38% 27% 19.5% 8.5% 18% 12% 0% 5% 10% 15% 20% 25% 30% 35% 40% 19981999 Telia (Sweden) Telecom Portugal Telenor (Norway) Source: PTO annual reports. Note: For Telia, Internet traffic as % of local minutes. For others, as % of total

16. Egypt Telecom’s Voice over IP service Alliance formed with eGlobe (US) Marketed through ISPs (including Egypt Telecom’s own ISP); ISPs get 10% of revenues Marketed via pre- paid cards Majority of calls are incoming Long-term plan to move whole network to IP platform Calls to US cost US$0.23 per minute, compared with US$1.32 for PSTN

17. IP Telephony Traffic: Substitute or supplement? Historically, IP Telephony has been a substitute for high-cost PSTN telephony:  Avoiding long-distance and international call prices;  Avoiding above-cost settlement rates. Increasingly, IP Telephony is becoming a supplementary application, offered by ISPs:  “Free” PC-to-Phone calls to US and elsewhere;  Integrated messaging and computer/telephony. In future, a majority of telephony offered by telecom carriers will be “IP Telephony”:  Integrated voice and data networks;  Regulators need to be consistent in approach.

18. Conclusions: Implications depend on who is asking question … For Consumers, IP Telephony offers cheaper international telephone calls and integrated messaging For Internet Service Providers, “voice” is a potential killer application to make their sites more attractive For incumbent Public Telecommunication Operators, IP Telephony will accelerate rebalancing between international and local calls. It is a threat, but also an opportunity. For new market entrants, IP Telephony offers low-cost, low-risk market access For Regulators, IP Telephony poses many difficult questions!